Coronavirus, confinement, crisis, rescue, spending. To that list of words, one more should be added: debt.
Governments and companies, as well as many families, have gone into debt to face the worst global economic crisis in recent decades.
Some have done so because the situation is dire. But others, they are taking advantage this time of “cheap money” thanks to low interest rates globally and the rivers of dollars that run everywhere.
Governments – through the sovereign bond issuance– have gone into debt to pay for the gigantic fiscal expenditure caused by the pandemic, while some of the largest companies operating in the world have benefited from the easy money streak.
In economic jargon they speak of “issuing debt” when you go out to the markets to get financing. And what the big international investors do is buy that debt from you.
Unlike rich countries, Latin America has become attractive to large investment funds because offers higher interest relative to the rest of the world.
That is the fundamental reason that explains the constant flow of private capital to the region in the midst of the crisis. And most of that flow comes from investors on Wall Street.
Between buying debt in Latin America and buying debt in the United States (such as Treasuries, for example), it is better business at this time for investors to buy debt in the region, even if the risk is higher.
Elijah Oliveros-Rosen, senior economist in the Latin America Global Economics & Research division of the consulting firm S&P Global Ratings, explains that currently “There is a global debt issuance fever.”
This fever has two main causes, says Oliveros-Rosen in dialogue with BBC Mundo.
The first is related to fiscal stimulus packages implemented by all countries to counteract the economic impact of the pandemic.
In emerging countries, this spending was around 4% of the Gross Domestic Product (GDP).
The second reason is that interest rates, mainly in the richest economies, are at their lowest levels in history.
That is why many countries and companies should borrow. And that debt is not only to cover a higher level of expenses, but also to refinance previous debts.
“It is the same as when you are going to refinance your home mortgage. If you get a lower interest rate, you should renegotiate the credit ”, explains the economist.
In 2020, Latin America issued government and corporate debt bonds for a value close to $ 157 billion in international markets, says Emre Tiftik, director of Sustainability Research at the Institute of International Finance of the United States (IIF, for its acronym in English).
This global figure does not include the debts issued by Argentina and Ecuador in 2020, due to their limited access to international debt markets.
“We have seen a greater issuance of corporate bonds, although the increase in the issuance of sovereign bonds was notable, reaching record highs,” he tells BBC Mundo.
“We are in a better economic environment”
Alberto Ramos, director of Economic Research for Latin America at the multinational investment bank Goldman Sachs, points out that economic growth is beginning to return to Latin America and that arouses the interest of investors.
“We are in a best economic environment in the region than six or nine months ago ”, he points out.
And the other factor that influences Wall Street’s interest in financing the region is the low global interest rates. That causes “a great appetite to buy debt in emerging countries”, not only in Latin America.
“There are trillions of dollars with negative rates” circling the world in a highly liquid environment, he explains, something that benefits Latin America.
Added to that are favorable outlook for commodity prices and a weaker dollar, all reasons that favor emerging economies and increase the appetite to invest in them.
Governments and companies need to finance themselves and for that, that private capital flows to the region, is an advantage, experts say. It’s like having the doors of the bank open.
“If companies in Latin America can borrow at low interest, that’s a good thing,” says Ramos.
As the region has low levels of local savings and investment, it is important that they can get international financing, he points out.
The biggest risk in the current scenario is that interest rates rise outside the region or for exchange rates to depreciate. However, the economist explains, there are financial mechanisms to mitigate these types of risks.
The other risk mentioned by the experts consulted by BBC Mundo is that there may be a capital outflow, that is to say, that the big investors go to other countries in search of better yields.
What would have to happen for a capital flight to take place from the region? Basically that other markets become more attractive to invest.
In fact, the possible approval by the United States of the new stimulus package US $ 1.9 trillion to mitigate the economic consequences of the pandemic has raised the yields of US bonds in the longer term, reaching highs of almost a year ago.
The “tantrum” of the markets
The expectation that the fiscal stimulus package in the United States will boost economic growth and generate an increase in inflation has caused fears of a new episode of the so-called “taper tantrum”.
What was the “taper tantrum? In 2013 there was a tantrum in the markets when the United States Federal Reserve (Fed), equivalent to the central bank of that country, began to prepare the ground for a “tapering”, or gradual withdrawal of stimuli.
In other words, a reduction in its bond purchase program, which meant a decrease in the purchase of debt and the massive liquidity with which the central bank had flooded the economy in previous years.
The withdrawal of stimuli and the possibility of an increase in interest rates, caused a wave of bond sales that plunged their prices and skyrocketed profitability.
“Rates went up very quickly in the United States,” explains Elijah Oliveros-Rosen of consultancy S&P.
“Then it became less attractive to invest in emerging countries and there was a flight of capital from the region.”
The market tantrum triggered volatility and created a domino effect. The dollar appreciated against emerging currencies and both debt and equities in those markets also fell.
Can a “taper tantrum” be repeated? Despite the fact that Fed Chairman Jerome Powell has not given any sign of an interest rate hike, or any hint to change the current expansionary policy, in the corridors of Wall Street there is background noise.
The risk of inflation and rising rates
Investors, market analysts and economists positing the New Tantrum theory point out that if inflation rises too fast, the Fed will have to backtrack and raise interest rates.
Thus, the yield on US bonds would rise and Latin America would become less attractive to investors.
The risk then is that there will be a new flight of capital from the region, which is basically less facility to obtain external financing.
Nor should it be forgotten that beyond the external environment, there may also be domestic factors that drive capital flight in a specific country, such as political instability and uncertainty.
“At this moment the most important thing for the region is what happens with the interest rates globally ”, Oliveros-Rosen points out.
The risk is that if inflation expectations in the United States rise, the yield on US bonds will also rise.
But that is something very difficult to predict. In that Alberto Ramos agrees, who does not see a significant change in US monetary policy in at least a couple of years.
Anyway, says the economist, it is good that at some point the conditions change. If they don’t, would mean the economy is still sick.
“As the global economy recovers and leaves the pandemic behind, things will begin to normalize. That is a sign of health, not of weakness ”.
The most direct way to anticipate an eventual capital flight, experts say, is to spend less and as much as possible, save.
Although while the economic recovery does not take hold, that is not an easy task.